Table Of Content

Audit of the AANDC and Attawapiskat First Nation (AFN) Management Control Framework Aboriginal Affairs and Northern Development Canada September 28, 2012 Project #11-40 Table of contents Acronyms ....................................................................................................................................................... ii Executive summary ....................................................................................................................................... 1 1 Introduction and context ......................................................................................................................... 4 2 Audit objective and scope ....................................................................................................................... 8 3 Observations and recommendations .................................................................................................... 10 4 Management action plan ...................................................................................................................... 16 Appendix A: Audit criteria ............................................................................................................................ 17 © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework i Acronyms AANDC Aboriginal Affairs and Northern Development Canada ADM Assistant Deputy Minister AES Audit and Evaluation Sector BCR Band Council Resolution CFO Chief Financial Officer CFM Capital Facilities and Maintenance Program CMC Core Management Controls CMHC Canada Mortgage and Housing Corporation HIAA Housing and Infrastructure Assets Annual Report MLG Ministerial Loan Guarantee MTC Mushkegowuk Tribal Council RBAP Risk-Based Audit Plan RMP Remedial Management Plan RRAP Residential Rehabilitation Assistance Program © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework ii Executive summary Background In December 2011, a comprehensive audit1 was requested by the Minister and Deputy Minister of Aboriginal Affairs and Northern Development Canada (AANDC) due to concerns with the ongoing housing situation in the Attawapiskat First Nation community, particularly given the level of total funding (approximately $104M) provided to them between April 1, 2005 and November 30, 2011 by AANDC for various purposes including housing, infrastructure, education, and administration. In this instance, the term comprehensive audit consisted of a recipient audit of the Attawapiskat First Nation, to provide assurance that funding provided to the Attawapiskat First Nation was spent for its intended purposes and in compliance with the terms and conditions of all funding agreements signed with AANDC and Health Canada; and, an internal audit of the AANDC management control framework, to understand how AANDC oversight measures for housing related to the Attawapiskat First Nation were applied during that same period. The Attawapiskat First Nation was placed under co-management – a form of intervention employed by the Department with the goal of improving the financial situation of a recipient – by AANDC over ten years ago. On November 30, 2011, urgent housing health and safety issues in the community requiring immediate action were identified and resulted in AANDC appointing a Third Party Manager until such time as the community’s immediate needs would be addressed. On April 19, 2012, based on the progress made in remediating urgent housing-related health and safety issues, AANDC determined that the default situation was remedied and removed the First Nation from third party management. A recipient audit of the Attawapiskat First Nation was performed as part of the comprehensive audit and was done so in accordance with the Guideline on Recipient Audits under the Treasury Board Policy on Transfer Payments and the Directive on Transfer Payments and followed the Canadian Institute of Chartered Accountants’ Assurance Handbook Section 9100, Reports On The Results Of Applying Specified Auditing Procedures To Financial Information Other Than Financial Statements. The results of the recipient audit were issued through a separate report to AANDC management. Roles and responsibilities First Nations own and operate housing on reserve and are responsible for the completion and ongoing management of housing projects. These responsibilities include rent collection, repair and maintenance, and ensuring that units constructed meet or exceed the requirement of the National Building Code of Canada or an accepted equivalent code. The Government of Canada’s role with respect to on-reserve housing is to support the First Nation in providing their membership with safe and affordable on-reserve housing. This support is primarily achieved through programs and services offered by AANDC, Canada Mortgage and Housing Corporation (CMHC) and Health Canada. AANDC makes funding available to First Nations for the establishment and maintenance of an on-reserve housing program primarily through contributions made from the minor core capital component of the Capital Facilities and Maintenance Program (CFM). According to the terms and conditions of the CFM 1 This comprehensive audit did not include an assessment of the efficiency and economy in the design and operation of programs and services and was not intended to conclude on value-for-money spent. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 1 program, minor core capital funds can be used to assist in the construction and renovation of houses, as well as for the implementation of First Nation community-based housing plans, which may include elements such as maintenance and insurance, debt servicing, training, management, and support to establish housing authorities. AANDC also administers the Ministerial Loan Guarantee (MLG) Program which provides the loan security required by lenders (including CMHC) who extend debt financing to First Nations or individual band members for the construction, acquisition or renovation of on-reserve housing. CMHC loans provided to Attawapiskat First Nation for the construction of new on-reserve housing units for the period covered by the audit (April 2005 to November 2011) were guaranteed by the Minister of AANDC through MLGs. The total value of MLGs provided by AANDC to CMHC for Attawapiskat First Nation loans during this period was $7.3M. CMHC provides financial assistance to First Nations in the construction, purchase, rehabilitation, and administration of suitable, adequate and affordable rental housing on-reserve. This financial assistance, provided in the form of loans and subsidies, is predominately achieved through two programs: the On- Reserve Non-Profit Housing Program and the On-Reserve Residential Rehabilitation Assistance Program (RRAP). Health Canada’s role in housing is focused on research and providing expert inspections, when called upon, to determine if a house is fit to live in and providing advice on corrective action, if required. Audit objective and scope The objective of this internal audit was to provide the Deputy Minister and Minister of AANDC with assurance that the AANDC management control framework in place was adequate and effective in ensuring compliance with Treasury Board and departmental policies and directives governing transfer payments and that AANDC monitoring, oversight, and reporting practices were effective and functioning as intended. The scope for this audit was April 1, 2005 to November 30, 2011 and included an examination of the AANDC management control framework for housing and an examination of AANDC’s relationship with other federal funders for housing. The scope included audit procedures performed at AANDC Headquarters and the AANDC Ontario North Regional Office (located in Thunder Bay), which is AANDC’s primary support office for the Attawapiskat First Nation. While the roles and responsibilities of other federal funders (i.e. CMHC and Health Canada) were reviewed and these departments were consulted for this audit, only AANDC internal controls were examined and tested as part of the audit scope. Where applicable, observations related to the practices of other federal funders were communicated to their respective senior management. Observed strengths Throughout the audit fieldwork, the audit team observed several examples of how controls are properly designed and are being applied effectively by management. This resulted in several positive findings as follows: • AANDC, CMHC, and Attawapiskat First Nation, were working in partnership at the regional level to determine allocations of housing funds for the Attawapiskat First Nation; • From a financial perspective, major core capital projects and Canada’s Economic Action Plan projects related to Attawapiskat First Nation housing were well monitored by AANDC; • Assessments and approval decisions for Attawapiskat First Nation minor core capital activities, major core capital housing, and payments related to housing were executed in a timely manner by AANDC individuals with appropriate delegated authority; and, • Monitoring controls as well as system controls built into AANDC financial systems were used adequately to ensure funding commitments for Attawapiskat First Nation housing activities did not exceed authority levels and program budgets. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 2 Statement of assurance Sufficient and appropriate audit procedures have been performed and evidence gathered to support the accuracy of the conclusions reached and contained in this report.2 The conclusions were based on observations and analyses of the situations as they existed at the time against the audit criteria. The conclusions are only applicable to the Audit of the AANDC and Attawapiskat Management Control Framework. The evidence was gathered in accordance with the Internal Auditing Standards for the Government of Canada and the International Standards for the Professional Practice of Internal Auditing. Conclusion Areas where AANDC management practices could be improved were noted in the following areas: compliance and enforcement of Ministerial Loan Guarantee funding agreements’ terms and conditions, Capital Facilities and Maintenance Program minor core capital funding practices, and housing performance measurement and reporting. Recommendations The audit team identified areas where management controls, practices and processes could be improved, resulting in two recommendations. The Audit and Evaluation Sector recommends that: 1. The Ministerial Loan Guarantee process should be reviewed, in consultation with CMHC, giving consideration to the following: • Developing stricter enforcement practices with respect to eligibility requirements and taking remedial action with regard to non-compliance; • Implementing practices to certify completion of housing units by a suitably qualified professional according to National Building Code of Canada standards or an accepted equivalent set of standards; • Conducting a risk-based periodic review of First Nation inspection records; and, • Developing formal practices (e.g. Memorandum of Understanding between AANDC and CMHC) to require that the results of CMHC Physical Condition Reviews and client visit reports be shared with AANDC as a mandatory requirement of the eligibility process. 2. The Capital Facilities and Maintenance (CFM) Program terms and conditions should be reviewed, giving consideration to the following: • Including eligibility requirements which require demonstrated financial management capability with respect to the First Nation’s housing program (e.g. Replacement Reserve Account, collection practices, reliable housing reports); • Adding the requirement that a separate Housing Authority be established as a CFM eligibility requirement; • Discontinuing the practice of allowing minor core capital to be used for the purposes of debt repayment; and, • Clarifying housing report definitions and developing housing performance indicators which can be used to assess maintenance needs and establish a baseline on which to measure ongoing performance. 2 AANDC reviewed two consecutive drafts of the internal audit report with CMHC officials, including the Acting Chief, Audit and Evaluation Services, in order to verify the facts and ensure accuracy of the representations made in this report. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 3 1 Introduction and context 1.1 Background In December 2011, a comprehensive audit3 was requested by the Minister and Deputy Minister of Aboriginal Affairs and Northern Development Canada (AANDC) due to concerns with the ongoing housing situation in the Attawapiskat First Nation, particularly given the level of funding (approximately $104M4) provided to them between April 1, 2005 and November 30, 2011 by the AANDC for various purposes, including housing, infrastructure, education, and administration. In this instance, the term comprehensive audit consisted of a recipient audit of the Attawapiskat First Nation, to provide assurance that funding provided to the Attawapiskat First Nation was spent for its intended purposes and in compliance with the terms and conditions of all funding agreements signed with AANDC and Health Canada; and, an internal audit of the AANDC management control framework, to understand how AANDC oversight measures for housing related to the Attawapiskat First Nation were applied during that same period. Due to concerns regarding the community’s financial management practices, the Attawapiskat First Nation was placed under co-management – a form of intervention employed by the Department with the goal of improving the financial situation of a recipient – by AANDC over ten years ago. On November 30, 2011, urgent housing health and safety issues in the community requiring immediate action were identified and resulted in AANDC placing the community in third party management until such time as the community’s immediate needs would be addressed. On April 19, 2012, based on the progress made in remediating urgent housing-related health and safety issues, AANDC determined that the default situation was remedied and removed the First Nation from third party management. A recipient audit of the Attawapiskat First Nation was performed as part of the comprehensive audit and was done so in accordance with the Guideline on Recipient Audits under the Treasury Board Policy on Transfer Payments and the Directive on Transfer Payments and followed the Canadian Institute of Chartered Accountants’ Assurance Handbook Section 9100, Reports On The Results of Applying Specified Auditing Procedures To Financial Information Other Than Financial Statements. The results of the recipient audit were issued through a separate report to AANDC management. 1.2 Roles and responsibilities The provision and management of housing on reserve lands is the responsibility of the First Nation. First Nations own and operate housing on reserve and are responsible for the completion and ongoing management of housing projects. These responsibilities include rent collection, repair and maintenance, and ensuring that units constructed meet or exceed the requirement of the National Building Code of Canada or an accepted equivalent code. The Government of Canada’s role with respect to on-reserve housing is to support the First Nation in providing their membership with safe and affordable on reserve housing. This support is primarily achieved through programs and services offered by AANDC, Canada Mortgage and Housing Corporation (CMHC), and Health Canada. A breakdown of the roles and responsibilities for each party as it relates to on-reserve housing is outlined below. 3 The term comprehensive audit does not include an assessment of the efficiency and economy in the design and operation of programs and services. This audit is not intended to conclude on value-for-money spent. 4 This figure does not include $13M in funding that was provided after November 30, 2011, which included $3.75M for housing- related activities. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 4 Attawapiskat First Nation The Attawapiskat First Nation’s Chief and Council are responsible for administering housing programs and ensuring compliance with the terms and conditions of AANDC funding agreements, CMHC operating agreements, and other funding agreements signed with the Government of Canada. The Attawapiskat First Nation owns and operates on-reserve housing and is responsible for the completion and ongoing management of housing projects, including revenue/rent collection and maintenance and repair of the units, once complete. The Attawapiskat First Nation is also responsible for ensuring that units constructed meet or exceed the requirement of the National Building Code of Canada or an accepted equivalent code. For the Attawapiskat First Nation, technical reviews and site inspections are performed by Mushkegowuk Tribal Council. Mushkegowuk Tribal Council is a non-profit Regional Council of Chiefs representing seven Cree First Nations in northern Ontario (including the Attawapiskat First Nation). The Mushkegowuk Tribal Council provides technical advisory, consultation, review and recommendation services in capital management, engineering and architectural related activities inherent in the management of real property and other capital assets to all First Nation communities that form part of the Mushkegowuk Tribal Council. Aboriginal Affairs and Northern Development Canada (AANDC) AANDC provides funding for housing, in the form of contributions, primarily through the minor core capital funding component of the Capital Facilities and Maintenance (CFM) program. AANDC minor core capital funds can be used for construction and renovation of houses, as well as for the implementation of First Nation community-based housing plans, which may include elements such as maintenance and insurance, debt servicing, training, management, and support to establish housing authorities. AANDC also administers the Ministerial Loan Guarantee (MLG) program which provides the loan security required by lenders (including CMHC) who provide loan financing to First Nations or individual band members for the construction, acquisition or renovation of on-reserve housing. Reserve lands are held by the Crown for the use and benefit of First Nations, as set out in the Indian Act. Under sub-section 89 (1) of the Indian Act, a non-Indian is prohibited from seizing Indian property, which effectively prevents the use of land on reserve as security for a loan and prevents seizure of real property located on reserve by a lender. These restrictions pose an impediment to Chief and Councils, individuals and businesses seeking loan financing such as mortgages for on-reserve projects, including housing. To mitigate this risk to the lender, AANDC issues MLGs to lenders in order to secure on-reserve housing loans. CMHC loans provided to the Attawapiskat First Nation were guaranteed by the Minister of AANDC through Ministerial Loan Guarantees (MLGs). During the audit period, $7.3M in loans was guaranteed by the Minister of AANDC using MLGs as loan security. Canada Mortgage and Housing Corporation (CMHC) CMHC provides assistance to First Nations in the construction, purchase and rehabilitation, and administration of suitable, adequate and affordable rental housing on-reserve. This assistance is predominately achieved through two programs: the On-Reserve Non-Profit Housing Program and the On- Reserve Residential Rehabilitation Assistance Program (RRAP). Through Section 95 of the National Housing Act’s On-Reserve Non-Profit Housing Program, CMHC provided loans and operating subsidies to the Attawapiskat First Nation for non-profit rental housing to support the financing and operation of housing units over the life of the loan. The RRAP offers financial assistance in the form of a forgivable loan to bring existing housing up to minimum health and safety standards and to modify housing to meet the needs of the disabled. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 5 As part of its housing portfolio management activities, CMHC conducts Physical Condition Reviews every five years. These reviews, which are of a non-invasive nature (i.e. no structural inspection is performed), are conducted on a sample basis and not on all units in the housing project. The purpose of these reviews is to assess and record the condition of the project; to identify potential improvements to maintenance and capital repair practices; and to assist in capital repair planning. Over the audit period of April 1, 2005 to November 2011, CMHC conducted one Physical Condition Review on housing units in the Attawapiskat First Nation. This Physical Condition Review of the Attawapiskat First Nation community was conducted in April 2009 and included a review of five housing units (in a project of 27 units). In addition to the five year Physical Condition Reviews, CMHC conducts client site visits every three years. The purpose of these client visits is to review the First Nation’s management and accounting systems in support of their housing program, and provide the First Nation with feedback and any recommendations for improvement. The client visits look at management practices in the areas of organization, finance, rentals and tenants, maintenance, and training needs and the results of the client site visit are shared with the First Nation. The most recent client visit of the Attawapiskat First Nation was conducted by CMHC in May 2010. CMHC’s Aboriginal Capacity Development facilitates the acquisition of skills, training and resources to support First Nations to achieve their housing objectives. Health Canada Health Canada provides support for First Nation health and safety related housing issues (e.g. mould, ventilation), but its programming (e.g. Environmental Public Health Program) is focused on research and providing expert inspections, when called upon, to determine if a housing dwelling is fit to live in from a health and safety perspective and providing advice on the corrective action required. Health Canada does not provide Attawapiskat First Nation funds for the construction of housing. 1.3 Funding profile Between April 1, 2005 and November 30, 2011 approximately $104M in total funding was provided to the Attawapiskat First Nation by AANDC. Of that total, approximately $8.3M5 in contribution funding was provided by AANDC for housing-related activities through the Capital Facilities and Maintenance (CFM) program, which included $6.85M for housing maintenance; $1M for immediate housing needs; and, $450K for housing renovations under Canada’s Economic Action Plan. During that same period, CMHC provided the following funding to assist in the construction and renovation of rental housing on reserve: $7.3M in loans which were guaranteed by the Minister of AANDC using Ministerial Loan Guarantees (MLGs) as loan security; $1.7M in operating subsidies (un-secured); and $0.3M for renovations. 5 This figure does not include $3.75M in housing-related funding that was provided after November 30, 2011. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 6 1.4 Housing lifecycle For the purposes of this audit report, the housing lifecycle has been broken into four phases: construction, inspection, management and maintenance, and reporting. Descriptions for each phase of the housing lifecycle are as follows: • Construction – is the initial step of adding a housing structure to a community’s inventory of real property. The construction of housing units is managed by the First Nation and funded through own- source revenue, loans6 provided by CMHC or another lender (and secured by AANDC through a Ministerial Loan Guarantee) or a combination of the two. In this instance, loans for housing construction were provided by CMHC and were subject to the terms and conditions of AANDC MLGs and CMHC loan agreements. According to the terms and conditions for these funding agreements (MLG and loan agreements), residential construction practices, technologies, and resources used in the construction phase by the First Nation must conform to local building authority regulations and National Building Code of Canada standards or an accepted equivalent set of standards. CMHC conducts progress inspections during construction to support making loan advances. CMHC reported that using Tribal Councils to conduct progress inspections is a standard practice for many First Nation Communities. • Inspection – site and project progress and completion inspections are an extremely important part of the housing construction quality control process. General contractors/builders appoint site supervisors to review the completed work and to check that the work has been done according to the design specifications and accepted building codes and construction standards. Building inspectors who inspect the construction quality of the housing unit must generally pass specific courses and/or be certified to perform these duties. CMHC requires a written declaration from an authorized representative of the First Nation that units constructed meet the requirements of the National Building Code of Canada or an acceptable equivalent set of standards. • Manage and maintain – includes the ongoing management of the housing program by the First Nation. This phase normally includes ongoing maintenance, administration, implementation, and enforcement of housing policies which address the housing needs of the community membership in a fair, open, and transparent manner. The creation of a separate housing authority that is arm’s length from community political control has long been advocated to First Nations as a means to ensure a clear separation of powers in determining the required number of housing units, allocating available homes to tenants, ensuring the ongoing collection of rent, and providing for a regular maintenance routine. However, CMHC indicates that it is not aware of any such entities in Ontario First Nations. • Reporting – includes the tracking and measurement of performance with respect to housing activities undertaken by a First Nation as well as funds provided by AANDC (i.e. minor core capital contributions) used in support of a First Nation’s housing activities. This phase also includes reporting by a First Nation to AANDC on the current state of housing in the community. 6 During the construction phase, CMHC only provides loans. Operating subsidies are provided by CMHC in the Manage and Maintain phase. © Deloitte & Touche LLP and affiliated entities. Audit of the AANDC and AFN Management Control Framework 7